USA Worse Off in a “Better Than” Economy

If the definition of “insanity” is, as Albert Einstein asserted, “doing the same thing over and over and expecting a different result,” Federal Reserve Chairman Ben Bernanke is insane. And if he is insane, he deserves our pity, rather than our scorn.

Therefore, your editors here at The Daily Reckoning pity the Federal Reserve Chairman…poor ol’ “Crazy Ben.” They also pity the rest of the folks on the Federal Open Market Committee who repeatedly endorse Crazy Ben’s failing tactics.

After several years of pursuing “non-traditional policy tools,” as Chairman Bernanke described them in his speech at Jackson Hole, the US economy continues to exhibit a non-traditional lethargy.

Nevertheless, Crazy Ben credits his non-traditional — we call them “wacky” — tools for making the economy stronger than it would otherwise have been. And if the economy doesn’t improve soon, Ben promises to do more of what hasn’t worked.

In simple English, Bernanke’s non-traditional policy tools consist of manipulating and/or “communicating” his intention to do so. [Other tools include clandestine market manipulations that do not make their way into the minutes of FOMC meetings or the transcript of Jackson Hole addresses].

“Now, with several years of experience with non-traditional policies both in the United States and in other advanced economies,” the Chairman explained at Jackson Hole, “we know more about how such policies work.

“It seems clear, based on this experience, that such policies can be effective, and that, in their absence, the 2007-09 recession would have been deeper and the current recovery would have been slower than has actually occurred…”

The Chairman even goes so far as to put hard numbers on the “better than” economy he claims to have produced.

“Model simulations conducted at the Federal Reserve generally find that the [Fed’s] securities purchase programs have provided significant help for the economy,” Bernanke asserted. “For example, a study using the Board’s FRB/US model of the economy found that, as of 2012, the first two rounds of LSAPs [large-scale asset purchases] may have raised the level of output by almost 3 percent and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred.”

(Hmmm…that’s interesting because model simulations here at The Daily Reckoning found that the Fed’s activities during the crisis raised the earnings of Goldman Sachs by infinity percent, while also increasing the compensation of Goldman’s CEO, Lloyd Blankfein, by more than $200 million.)

So there you have it; the US economy is better by three percentage points of growth and by 2 million jobs, thanks to the fact that Bernanke printed $2 trillion and used the funds to purchase distressed bonds from Wall Street banks.

Even if we were to accept Bernanke’s guesses as Gospel, the results would be pathetic. In round numbers, Bernanke printed up dollars equivalent to about 15% of GDP and, therefore, enabled the nation’s GDP to grow by 3%.

That’s called a “bad trade.”

Here’s a “model simulation” to consider: What would have happened to the economy if Bernanke had taken those $2 trillion he printed up and mailed the money to every household in America, instead of funneling it to Wall Street banks? Under this simulation, each American household would have received a check for about $17,507.

Just maybe, a $17,500 windfall per household would have produced something better than a 3% bounce in GDP.

But that’s not what happened. Instead, the Chairman squandered all that cash buying the distressed bonds the Wall Street banks couldn’t sell to anyone else. This “policy tool” was not capricious, mind you. Bernanke explained that his non-traditional tools were all “guided by general principals and some insightful academic work.”

Still not convinced? Let’s take a look at the “better than” economy Ben Bernanke has produced and see what it looks like…

1) On average, every cohort of working-age Americans is worse off today than it was in 2009, which is roughly when Bernanke began firing up his non-traditional policy tools. Median incomes are down in every age group from 25 to 64. Even so, Bernanke says working-age Americans are better off than they would have been.

2) The nation’s (official) unemployment rate can’t seem to break below 8%. Further, the total number of employed Americans today is still below what it was at the end of 2008, even though the size of the American workforce has continued to grow during that timeframe. Even Bernanke admits that the nation’s employment growth is “far from satisfactory.” Nevertheless, the Chairman says the unemployment rate would have been even worse without the help he provided.

3) Over in the manufacturing sector, the ISM Index of manufacturing activity in the US has been slumping for 19 months, and has achieved zero net improvement during the last four years. The Chairman says that’s a better result than what would have been.

4) Many of America’s leading companies are reporting poor profitability…and forecasting more of the same. McDonald’s recently announced its worst quarterly sales in two years. Priceline, PepsiCo and Procter & Gamble all announced similarly downbeat results. “Bad news to be sure,” Bernanke would probably say, “but be happy you didn’t see what would have happened.”

Maybe so. But who’s to say what’s “better than”?

As the Chairman himself admits, “While there is substantial evidence that the Federal Reserve’s asset purchases have lowered longer-term yields and eased broader financial conditions, obtaining precise estimates of the effects of these operations on the broader economy is inherently difficult, as the counterfactual — how the economy would have performed in the absence of the Federal Reserve’s actions — cannot be directly observed.”

In other words, unborn statistics tell no tales. The only thing we know for certain is that the Fed’s balance sheet is MUCH larger than it would otherwise have been…and that the economy is still stuck in neutral.

As the nearby chart illustrates, the Federal Reserve’s balance sheet has more than tripled during the last four years. And yet, during that identical timeframe, the ISM Manufacturing Index has achieved zero net growth.

Intriguingly, despite the Fed’s multi-trillion- dollar hyperactivity and market manipulations, US manufacturing activity is not performing any better than manufacturing activity in Europe and China. In fact, all three are tracking each other very closely.

So just maybe, the economy would be much better off today if the Chairmen had spent the last four years playing golf, instead of overtly and covertly manipulating the financial markets.

Just maybe the time has come to draft a simple “Thank you” note to the Chairman.

Dear Ben,

Thanks so much for all your help. But you can take a break now. Really, it’s okay.

Sincerely,

Impoverished Masses

Unfortunately, Crazy Ben has no intention of taking a vacation. To the contrary, he continuously promises to do more of the same stuff that may or may not be helpful or harmful.

As only the Chairman could put it, “[B]oth the benefits and costs of non-traditional monetary policies are uncertain; in all likelihood, they will also vary over time…[Therefore], taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”

In other words, “We have no idea if what we are doing is helpful or harmful, but we promise to do more of it if conditions worsen.”

Eric J. Fry has been a specialist in international equities since the early 1980s. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short- selling. Mr. Fry launched the sometimes-abrasive, mostly entertaining and always insightful Rude Awakening.

Leave a Reply

Be the First to Comment!

Connect with:

Notify of

Notify of new replies to this comment

Notify of new replies to this comment

Letters will be edited for clarity, punctuation, spelling and length.
Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@dailyreckoning.com.au

Follow us on

Testimonial

Just thought I would let you know that whilst I receive countless financial emails daily I view yours as something special. I am not looking for the same old humdrum I am looking for news that is out of left field. Now you guys would be off the planet if you went any further left but it is refreshingly different. I get through the humdrum first and get my mind sorted and save you for last as a check. It is certainly an insane moment in time but I am still finding investment opportunities. Thanks for your comments